UOB KayHian: Raises ST Engineering earnings view on MRAS acquisition

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UOB KayHian raised its earnings forecasts for ST Engineering after increasing its outlook for MRA Systems, which the company is set to acquire.

ST Engineering said in mid-September that its wholly owned U.S. subsidiary Vision Technologies Aerospace entered a deal to acquire all of MRA Systems from General Electric for US$630 million, or around S$868 million.

Baltimore, Maryland-based MRA Systems, or MRAS, which has around 800 employees, is an original equipment manufacturer (OEM) of engine nacelle systems for both narrow-body and wide-body aircraft.

Airbus has guided that 2019 aircraft production will rise toward 63 a month by the middle of the year, compared with an average of 55 a month as of August, and Airbus has a backlog of more than 6,000 orders for the A320 Neo, UOB KayHian noted in a note on Monday.

That should push up MRAS production rates, it said.

“Given the huge backlog on the Airbus A320 Neo aircraft, we are now more confident that it will more than offset the decline in production of the more mature nacelles,” UOB KayHian said. “We are now more confident that the acquisition of MRAS will add value to shareholders.”

Assuming the deal is completed by the first quarter of next year, UOB KayHian said it estimated MRAS’ 2019 net profit contribution would be around S$39 million, up 6.7 percent from its previous estimate.

UOB KayHian raised its ST Engineering earnings forecasts for 2019 and 2020 by 6.7 percent and 9 percent respectively. It also raised its target price to S$4.06 from S$3.80.

It increased its 2019 dividend estimate by 1 Singapore cent to 17 Singapore cents, for a forward dividend yield of 4.8 percent.

“We deem this attractive for an AAA-rated firm,” it said, keeping a Buy call.

It noted that at S$4.06, the stock would be trading at 20.5 times 2019 earnings.

“We believe the stock is undervalued,” it said, estimating 2019 price-to-earnings amount to just 17.9 times.

ST Engineering shares were up 0.28 percent at S$3.60 at 13:25 SGT.


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